Trade Tensions Send Canadian Dollar into Free Fall

The Canadian dollar has come under pressure due to ongoing trade tensions between Canada and the US. Since August 22, when negotiations collapsed, 50% tariffs have been imposed on approximately $20 billion of Canadian goods.

In response, Canada has retaliated with dollar-for-dollar tariffs worth $20 billion, including 50% levies on steel and aluminum. The impact is sector-specific for now, affecting around 5% of exports.

Economists are cautious about the effects of trade tensions on growth and inflation. The Bank of Canada's surveys have shown that business investment and hiring intentions have been negatively impacted by policy uncertainty.

Markets expect the central bank to maintain a dovish stance, with only one rate hike penciled in for 2Q 2027. The Canadian dollar has underperformed its peers despite the tariff chaos, likely due to market expectations of negotiations and agreements.